AG Josh Shapiro clashes with Chesapeake Energy over gas royalty payments to landowners

US NEWS ENERGY 2 MCT-20122017-0001
Chesapeake Energy's watertanks are ubiquitous in northeastern Pennsylvania, where the company is the lead driller of natural gas. Now Chesapeake’s $30 million settlement over royalties to landowners is catching flack from Attorney General Josh Shapiro argues that homeowners are getting shortchanged.

Pennsylvania Attorney General Josh Shapiro is pushing back against pressure to resolve the state’s case alleging unfair treatment of thousands of landowners by natural gas drilling companies.

Chesapeake Energy Corp. recently reached a $30 million settlement agreement with Pennsylvania landowners in separate, private class-action cases based on allegations of improper or inflated deductions from gas royalty payments.

But attorneys for the Oklahoma-based company told a federal judge in late December that the company reserves the right to pull out of those proposed settlements — covering all 14,000 of its Pennsylvania gas-producing leases — if it can’t resolve the attorney general’s case as well.

In an editorial and a letter to the judge, Shapiro and a senior attorney in the office have called the company’s position a pressure tactic.

“I have no intention of allowing these companies to force our hand or shut us up,” Shapiro wrote in a guest editorial on New Year’s Eve in the Scranton Times-Tribune.

In a statement Friday, he reiterated his position, saying the state “sued to put an end” to the misconduct of “energy companies ripping off landowners.”

“There is nothing stopping these companies from settling in a totally separate case,” he said. “We’ll continue to pursue our case on behalf of every impacted landowner in Pennsylvania.”

Splitting the cases

Shapiro’s firm stance has reassured landowner advocates who complain that the class-action settlements’ payments are paltry and the protections  meager. But it threatens to annoy other landowners who are impatient to be paid and judges who are eager to see all sides reach an agreement.

The attorney general’s office alleges Chesapeake violated the state’s unfair trade practices law by inflating prices for shipping gas from wells to pipelines and then passing the costs on to Marcellus Shale royalty owners, whose monthly checks sometimes diminished to zero.

In the case filed in 2015, it also accuses the company of engaging in deceptive leasing practices and colluding with Texas-based Anadarko Petroleum Corp. to keep bonuses and royalty rates low in some counties.

Shapiro’s office views its case in state court as independent and has urged the company to sign off on the class-action settlements negotiated. At the same time, the office is asking the federal court to ensure that it does not limit the state’s right to pursue its own claims under Pennsylvania’a unfair trade practices law — an objection that Chesapeake attorneys say is delaying resolution of the private cases.

“Chesapeake, not the Commonwealth, owns any delay in whether it follows through on its commitment to compensate the class,” Senior Deputy Attorney General Joseph Betsko wrote in a Jan. 5 letter to U.S. District Judge Malachy Mannion.

The state’s attorneys have declined to participate in voluntary court mediation for now but said they will continue settlement discussions with Chesapeake while they also pursue their case in state court.

The attorney general’s office has assured Chesapeake that any settlement in the class actions would be used to offset any future monetary judgment in its own case. Chesapeake’s attorneys have rejected the offset idea, saying it would leave the company in the untenable position of fighting a parallel lawsuit about the same issues it is trying to resolve with the class-action settlements.

“That’s cold comfort for an entity that really wants not only to settle it, Judge, but have new and better relationships” with landowners, Chesapeake attorney Daniel Donovan said during the Dec. 20 status conference in Scranton with Mannion, according to a transcript of the meeting.

Anadarko has not yet reached a settlement with landowners in its own Pennsylvania royalty cases, but it is considering a structure similar to the Chesapeake settlements only if it can get a “global resolution” involving the attorney general’s case, its attorney Guy Lipe said at the December conference.

Landowners waiting for money

Landowner advocates are split about the attorney general’s approach. Some are encouraging him to push for a better deal, while attorneys representing the landowners in federal court would prefer him to step out of the way.

Commissioners in Bradford County, in the heart of Chesapeake’s northeastern Pennsylvania leasehold, are unhappy with the outlines of the proposed settlement they have heard. Commissioner Daryl Miller called it “peanuts.”

“There have been hundreds and hundreds of millions of dollars that have left our area” in questionable deductions, he said. “With a $30 million settlement? Are you kidding me?”

He said the attorney general’s stance is a productive one, and local landowners he’s spoken with are glad the state case is moving forward. “But there is also a skepticism,” he said. “They just feel that all of this is being dragged out and it’s taking way too long.”

Jackie Root, president of the state chapter of the National Association of Royalty Owners, said landowners deserve better than the terms of the proposed settlements, under which “most people are going to gain very little” but will likely give up a lot “for many decades to come.”

Landowners’ attorneys in the class-action cases, meanwhile, are discouraged by the attorney general’s position, even if they respect his intentions.

“They may win, but they also may lose,” said Larry Moffett, an attorney for one group of class-action plaintiffs. “What we do know is the outcome of the AG’s case is uncertain, and it will probably take years to resolve.

“We, on the other hand, have money — a lot of it — in hand that should be distributed now, and could be if the Pennsylvania attorney general would step aside and allow it to be done.”

A payment for each landowner

The proposed class-action settlements involve two pieces: a payment for each landowner that will refund a portion of the past deductions, and a reset of lease language that will give landowners the choice of how they would like to be paid going forward.

The settlement payment will be distributed proportionally based on how much was deducted from each landowner, Moffett said, so people with small properties will generally receive less than those with large farms.

“There is a wide range of amounts,” he said, but he added, “This is not a coupon settlement. It is real money. For some people, the checks, I suspect, will be substantial.”

Going forward, landowners will be able to decide whether they want to receive royalties based on a regional index price for the value of gas, without any deductions, or the usually higher price Chesapeake receives when it sells its gas in other markets, minus the costs of processing and transportation to get it there.

The second option is similar to the way royalties are calculated now, but protections will be written into the agreement to ensure future deductions are based on actual, reasonable costs, Moffett said, although the precise terms are still being worked out.

The landowners’ and companies’ attorneys are joined by the judges in both the state and federal cases in pushing the attorney general’s office to participate in mediation to resolve all of the matters together.

At the December conference, Judge Mannion called it “bureaucratic and not practical” for the state to decline to participate in mediated negotiations.

Senior Judge Kenneth Brown, who is presiding over the state’s case in Bradford County Court, wrote to the attorneys Jan. 12 to schedule a settlement conference “in the interest of achieving a global resolution of both cases.”

recent decision by Judge Brown largely in the commonwealth’s favor could buttress the attorney general’s position in negotiations with the companies.

But the county judge’s move to allow two crucial questions of law to be immediately appealed to the state Commonwealth Court has given Chesapeake’s attorneys confidence in their own position.

“Chesapeake remains committed to achieving a global resolution of the claims pending in this court, as well as Bradford County,” Daniel Brier, one of the company’s attorneys, wrote to Judge Mannion on Friday. But if the attorney general’s office commits itself to lengthy and expensive litigation, he added, “Chesapeake is confident” that the company “will be fully successful in its defense.”

Another status conference is expected to be held in federal court in February. Mannion has asked a high-ranking representative of the attorney general’s office to attend.

Laura Legere: